Gov. Jerry Brown fired the opening salvo of California’s budget season on Jan. 7 when he unveiled his spending proposal for the fiscal year that will start July 1. While the final state budget will likely look much different in June when it is scheduled to be adopted by the Legislature, Brown’s proposal is the starting point for negotiations in the months ahead.
Below are five numbers that help explain some of the major issues included in the governor's budget proposal.
Education: $2.8 billion
The number: Ahead of schedule, this is the latest money Brown has proposed for a new formula that determines how much each school district gets from a $71.6 billion education budget. The new plan, known as the Local Control Funding Formula (LCFF), is intended to help close the state’s “achievement gap,” which describes the lagging academic performance of some student groups including those who are low income, Latino and African-American. Since 2013, the LCFF established a new base level of funding for all schools and then added additional money for each “English learner” or low-income student in a district. The formula was designed to phase in by 2021 to minimize the disruption for each district. With a rapidly growing education budget -- up more than 50 percent since 2011 -- the state has been able to fund the formula ahead of schedule. With Brown’s latest proposal, the state will have funded 95 percent of the new formula.
Why it matters: Higher-income, white and Asian students have performed better on important academic measures than lower-income students and those who are not proficient in English. In the state’s most recent batch of standardized tests, less than 1-in-4 low-income or Latino children and less than 1-in-5 African-American children scored high enough to be considered proficient in math. About half of white students and more than two-thirds of Asian students measured as proficient on the same test. Educators hope to shrink this achievement gap with more programs, tutoring and other tools targeted toward low income and “English Learner” students. The ability of the state to direct more money, more quickly to these efforts will raise the opportunity and the expectations about closing the state’s “achievement gap.”
Health care: $1.1 billion
The number: This is the amount Brown is trying to rescue in federal funding for Medi-Cal, the state’s low-income health insurance program. Brown called a special session of the Legislature last year after federal authorities said the state’s method for taxing managed care organizations that offer healthcare coverage did not meet federal requirements. Last year, Brown tried to solve the problem with a new tax on managed care organizations. But the plan stalled when critics said it would raise costs to insurers that would be passed onto consumers and Republicans said a tax increase was not necessary. Any tax increase requires a two-thirds vote of the Legislature, so Republican votes are needed. In his budget recent press conference, Brown offered a new tax plan that he hopes will qualify for the federal funding, avoid higher insurance premiums, attract the Republican votes needed for passage and potentially generate more money for the private insurers. As he said, “it’s complicated.”
Why it matters: The Medi-Cal funding debate reflects a larger issue in California about the cost of state government and the growth in some of its entitlement programs. The state recently expanded the eligibility requirements for Medi-Cal and the cost of its projected growth is a concern for policymakers. Republicans have suggested that surplus money from the current fiscal year could be used to replace the $1.1 billion that federal authorities might suspend. But Brown has said that he favors the federal contribution because it is an ongoing and stable source of revenue. This issue also matters because the administration recently proposed that some money from the tax on managed care organizations should fund programs for the elderly and the developmentally disabled, an issue that has generated large protests in recent month.
Environment: $3.1 billion
The number: This is the amount available to pay for climate change programs in the next fiscal year that has been generated by the state’s new cap-and-trade program, which holds quarterly auctions where companies that release greenhouse gases can purchase special permits. The $3.1 billion includes cap-and-trade revenue projections from the next fiscal year as well as money from previous auctions that remains unspent. About 60 percent of the annual auction revenue is spoken for: 25 percent flows to the state’s high-speed rail project and about 35 percent is split between transit and sustainable housing initiatives. About 40 percent of the annual revenue is still undesignated. Combined with revenue from previous years, more than $2 billion is still up for grabs in the next fiscal year.
Why it matters: There are many ideas about how to spend such a large pot of money. Some are seeking the most effective plans for the environment and some are balancing other government costs. Some environmentalists and Republicans complain, for example, that the state’s high-speed rail project does not deserve these revenues because it does not adequately reduce greenhouse gas emissions. In his recent budget announcement, the governor proposed that the unspent cap-and-trade revenue go to a variety of programs including more money for transit, improvement of energy efficiency in buildings, biofuel investments, forest management and drought issues. Some environmentalists are frustrated that money from past auctions has yet to be spent and they favor short-term emission reduction strategies like incentives for the purchase of fuel efficient vehicles.
Minimum wage: $250 million
The number: This is the amount the governor included in his budget proposal to pay higher salaries to some state workers because the minimum wage was raised this year to $10 per hour. The state minimum wage has increased by $2 per hour in the past two years and government is one of the largest employers of minimum wage workers. Many of those workers are caretakers for the elderly and disabled.
Why it matters: Concern about income inequality and the growing ranks of the working poor has raised popular support for a higher minimum wage. Several cities in California have recently raised wages beyond the state and the federal minimum wage, which is less than $8 per hour. In particular, San Francisco and Los Angeles have already approved a phased-in hike in the minimum wage to $15 per hour. There is also an initiative seeking to qualify for the California ballot this November that would raise the state minimum wage to $15 per hour by 2020. In that case, Brown said the cost to state government would be $4 billion.
Savings: $8 billion
The number: This is the governor’s proposal for California's "Rainy Day Fund” reserve by July 2017. In 2014, voters approved automatic contributions to a budget reserve in order to protect against future economic downturns. In practice that means 1.5 percent of the state’s primary tax stream is deposited into the fund each year with an additional contribution in boom years from the state’s volatile capital gains taxes. According to the Department of Finance, if today’s economy holds steady, the Rainy Day Fund will have approximately $6 billion by July 2017. Brown has proposed an additional $2 billion deposit into the fund.
Why it matters: In his budget press conference, Brown emphasized that the state should prepare for another economic recession based on length of the recent recovery and his review of the nation’s typical business cycle over many decades. Brown said a recession in the near future is likely enough that his administration has modeled the impact of a downturn and it has taken steps to prepare for a negative impact on future state revenue. The state’s Legislative Analyst’s Office recently projected that the rainy day reserves have enough cash to weather a recession the size of the early 2000's “dot.com” bust without running deficits for almost three years. The issue is particularly sensitive in California, Brown said, because the state relies heavily on the volatile capital gains tax revenue that is generated primarily in good economic times by a relatively small share of the state’s wealthy.